Strong Dollar And Demand Concerns Weigh On Oil Prices

We begin by taking a look at some of the critical data in the energy markets this week, which reveals that despite the second consecutive increase in the oil rig count, falling oil prices have rebounded and are once again heading up.

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Oil prices touched two-month lows on Thursday, with WTI falling to around $45 per barrel. The catalyst for the large sell off this week was a much weaker than expected draw on U.S. oil inventories. Industry estimates called for a drawdown of roughly 6 million barrels but the EIA revealed a weaker 2.2 million barrel reduction, disappointing oil traders. Meanwhile, gasoline stocks, still at elevated levels, barely budged. Coming on the heels of a downward revision for U.S. gasoline demand from the EIA for April, the demand side picture does not look quite as good as once thought. WTI and Brent were heading for a weekly loss of around 7 percent this week, but edged up in the early trading hours on Friday.

Large U.S. production drop off. The fundamentals are not all bad. Nigeria may not be able to return as much oil as was expected just a few weeks ago (more on that below), and the EIA revealed an extremely large decline in weekly U.S. oil production. The weekly estimates should be taken with a grain of salt since they are less accurate than the retrospective monthly figures, but the EIA believes U.S. production fell by 194,000 barrels per day last week to just 8.43 million barrels per day (mb/d). A few more weeks of data will help clear up what is going on, but if that figure proves to be reliable, it would mean that U.S. output is down about 1.2 mb/d from the peak in April 2015.

Nigerian militants hit more Chevron assets. The Niger Delta Avengers struck remote manifolds, which are pipeline systems, operated by Chevron (NYSE: CVX) in Nigeria on July 6. The attack came just a few days after the militants blew up several of Chevron’s trunk lines. Nigeria’s oil minister said in late June that the country had brought oil production back up from 1.4 mb/d to 1.9 mb/d. He also said that Nigeria hoped to bring output back up to 2.2. mb/d in July, a level that Nigeria produced before the Niger Delta Avengers began their attacks earlier this year. But the end of the alleged ceasefire throws much of that into doubt. The prospect of a return of disrupted supply pushed down oil prices in late June, but the return of more attacks could do the opposite if the Avengers keep production offline. Meanwhile, Royal Dutch Shell (NYSE: RDS.A)lifted its force majeure on Bonny Light exports, after it succeeded in making repairs to the Bonny Terminal. That could add 200,000 barrels per day to Nigerian exports, although Shell declined to specify if production would return to that capacity.

Libya could resume more exports. Libya’s rival oil companies have promised to merge into a single National Oil Company, which could lead to a rise in oil production and exports after years of stagnation. Bloomberg reports that Libya will resume exports from two of its largest oil export terminals as early as next week. The Es Sider and Ras Lanuf – the first and third-largest oil export terminals in the country – have been closed since 2014. The nascent unified government is helping to create the political conditions for a return of some of Libya’s oil production. “The oil ports are now safe after Islamic State pulled back away from them toward Sirte,” a regional commander of Libya’s Petroleum Facilities Guard told Bloomberg. “The petroleum guards are now capable of guaranteeing the safety and security of oil tankers seeking to use the ports.” Libya has averaged 330,000 barrels per day of oil production this year, and while it is unclear how much oil could return, some Libyan officials have expressed confidence that they could double that amount in the short-term. Related: Chilcot Report: UK Oil Interests Were Lead Motive For Iraq War

OPEC members quickly taking on debt. Low oil prices are forcing Middle East oil producers to turn to the bond markets at the fastest pace ever. According to The Wall Street Journal, the Gulf Cooperation Council states of Saudi Arabia, the UAE, Bahrain, Kuwait, Qatar and Oman have raised a combined $18 billion in debt so far this year. Saudi Arabia could raise another $15 billion in the next few weeks as well. JP Morgan estimates that the Gulf States could raise a total of $35 billion this year, which would be double the record set in 2009 in the aftermath of the financial crisis when oil prices crashed into the $30s per barrel. Not only that, but the governments are paying slightly higher interest rates than other countries with similar credit ratings, suggesting that the bond markets are less confident in the oil producers’ ability to diversify their economies and open them up to non-oil investments.

OPEC largest market share since the 1970s. The IEA estimates that OPEC’s share of the oil market has climbed to 34 percent this year, the highest share since 1975. OPEC members have suffered from severe declines in revenues, but they have managed to hold onto the market at the expense of other oil producers.

Petroleum product storage levels high in Europe. Diesel, gasoline and heating oil are filling up in storage tanks in Europe, and inventories are so high that they are causing delivery delays, according to Reuters. Gasoil stocks rose by 4 percent this week in the Amsterdam-Rotterdam-Antwerp region, putting total stocks at 34 percent above year-ago levels. "There is so much stock in the system," Steve Sawyer, head of refining at FGE Energy, told Reuters. "We had almost 600,000 barrels per day of refining capacity out in France and margins barely moved,” he said. Worker strikes at refineries in France have failed to reduce the high levels of storage. Ships on the Rhine in Germany are having trouble unloading. The situation, already pushing refining margins down substantially, is very bearish for oil prices.

Brexit to cut global oil demand by 100,000 barrels per day. Most analysts see the Brexit as having a negative but small effect on the oil market. Barclays sees the Brexit reducing global oil demand by 100,000 barrels per day this year and next.